April 8, 2009 / 9:31 PM / 11 years ago

Economy, policy to delay new oil projects-analysts

WASHINGTON, April 8 (Reuters) - A weak global economy and the policy shift in the United States toward renewable energy will lead companies to cancel oil projects, a trend particularly worrisome to Saudi Arabia, analysts and economists told an energy conference on Wednesday.

With oil CLc1 falling from the peak of $147 a barrel last July to around $50 now, oil companies will have to slash spending and some could face bankruptcy until prices rebound.

“We’re really seeing the shift from the 20th century to the 21st century as being the death of oil and the end of the oil era,” said oil analyst Paul Sankey of Deutsche Bank at the annual Energy Information Administration (EIA) conference.

An underinvestment in oil projects while prices are low will inevitably create a supply crunch once demand returns, sending prices back to record highs, he said.

Soaring prices would only strengthen the global shift away from oil, Sankey said, causing as much headache for Saudi Arabia as its top customer the United States.

Susan Farrell, senior director at the consulting firm PFC Energy, said she expects a dramatic 29 to 30 percent drop in exploration and production spending.

“If you wait, not only will the price rise but the cost will drop so there are lots of incentives to put off new projects,” she told the conference.

Farrell noted some companies put off spending on mergers and acquisitions during the last two years so they are sitting on a lot of money. Others piled on debt to increase capacity and now they must pay the bills when demand has plummeted.

Sankey of Deutsche Bank said, “The equity market is looking at this as you get a pass for this year but you got to get back to $70 (a barrel) next year.”

Sankey said another year where the price of oil lingers at $50 a barrel will lead to the collapse of many smaller oil companies already at a 100 percent debt-to-capital ratio.

Farrell of PFC Energy agreed, saying, “We think, perhaps in 2010, there’s going to be a big shake out,” she said, referring to the likelihood of mergers of companies.

Many of the companies likely to disappear, she said, “tend to be the big explorers so you create an exploration hole when some of these companies disappear.”

She added that an increase in mergers could slow investment action further. “When you see two decent-sized companies merge, nothing happens for a year.”

Mergers equate to “a lot of project delay,” she said, as companies have to reevaluate their portfolio and reprioritize.

Still, API Chief Economist John Felmy said the drop in oil demand is much less severe than in the 1980s. Prices could rebound and a lot could change quickly, he said, creating a good reason to continue to invest despite low oil prices. (Reporting by Jasmin Melvin; Editing by Lisa Shumaker)

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